The late Leon Levy, the founder of the Oppenheimer Funds, related the importance of this mindset in his excellent autobiography The Mind of Wall Street: "Indeed, I can be wrong more often than I am right, so long as the leverage on my correct judgments compensates for my mistakes. At least that is how my investments have worked out thus far."

And Berkshire's Charles Munger: "To us, investing is the equivalent of going out and betting against the pari-mutuel system. We look for a horse with one chance of winning and which pays you three to one. You're looking for a mispriced gamble. That's what investing is."

With gold and silver, I create various scenarios that these two PM's will sell for if X or Y happens. Then I compare the estimated upside to the chance of loss.

As you point out, gold and silver sell for about their cost of production, which means producers on the right side of the cost curve will stop mining, which reduces supply and drives prices higher. So from a micro-economics perspective, PM's should be at their approximate lows.

Now I want to estimate how high prices may climb. So let's look at a few of my gold calculations.

Estimate #1: Dow-Gold. Current ratio is 12x. During prior periods of market stress this ratio has fallen to 1x. If the Dow falls to 2x, then gold will sell for $7,568, a 524% gain from current prices.

Estimate #2: U.S. currency is $1.2 trillion. Meanwhile, U.S. gold is 261.5 million ounces*. If U.S. currency is 100% backed by U.S. gold, then gold will sell for $4,553, a 275% gain. (Formula: $1,190,500,000,000/261,499,377).

The most ambitious scenario is if the global markets demand the U.S. to collateralize our $16.8 trillion of debt. If so, then we are looking at $64,000-an-ounce gold, a 5,195% gain. (Formula: $16,796,000,000,000/261,499,377).

Some of these prices are so high, it's hard to comprehend. On the other hand, in studying 5,000 years of economic history, I don't know any fiat currency that achieves immortality. So somewhere along the line the global paper money system will change, I suspect.

If you want me to explain any of the other gold or silver calculations, let me know.